Will technology kill convergence?

At last week’s annual meetings of the World Bank and the International Monetary Fund in Lima, Peru, one topic that dominated discussions was the slowdown in emerging-economy growth. Hailed in the wake of the 2008 financial crisis as the new engines of the world economy, the emerging economies are now acting as a drag on global growth, and many argue that their era of rapid expansion – and their quest to achieve convergence with advanced-country income levels – is over. Are the doomsayers right?

There is certainly reason for concern – beginning in China. After decades of nearly double-digit growth, China appears to be experiencing a marked slowdown – one that some argue is actually worse than official statistics indicate.

As China’s growth slows, so does its demand for oil and commodities, with severe effects for other emerging economies that depend on commodity exports. Moreover, the benefits of lower commodity prices do not seem to have materialized among net importers, except perhaps India; if they have, they have been far from adequate to offset other growth-damaging forces.

Meanwhile, the advanced economies are tentatively recovering from the 2008 crisis. As a result, the differential between growth in the emerging and advanced economies – aggregated from IMF data, and including Hong Kong, Singapore, South Korea, and Taiwan in the emerging group – has declined considerably. Indeed, after averaging three percentage points for two decades and rising to 4.8 percentage points in 2010, the percentage-point differential fell to 2.5 last year and is expected to amount to just 1.5 this year.

The question, then, is whether the growth differential will remain as low at it is today. Those who believe that it will, typically rely on three arguments, all of which require some qualification.

First, they argue that much convergence has already taken place in manufacturing. This is true, but it neglects the increasing interconnectedness of manufacturing and services, and the changing nature of many services. An iPad, for example, must not just be built; it also needs coding services. In a sense, it is actually more the product of the modern services sector than of manufacturing. And there are plenty of untapped opportunities for technological catch-up in, say, health, education, and financial services.

Second, emerging-market bears point out that these economies have gained major productivity benefits from the migration of surplus rural labor to urban areas, a surplus that will soon be exhausted. This, too, is true. But it ignores the fact that there still is a huge reservoir of urban labor in the informal sector that, upon shifting to the formal sector, would provide an additional boost to productivity.

The pessimists’ third argument is that emerging economies are not implementing fast enough the structural reforms needed to support long-term growth. Again, there is some truth to this argument: structural reforms are needed everywhere. But there is no proven way to measure the pace of their implementation. As a result, it is difficult to argue that the emerging economies have collectively slowed in their structural-reform efforts.

But there may be a fourth mechanism at work, related to the changing – and seriously disruptive – nature of new technologies. A major driver of past catch-up, if only in terms of incremental growth, was the shift of many activities in both the services and manufacturing sectors from advanced economies to developing countries with lower wages.

Now, however, a growing array of activities can be automated. And coding-supported products often have lower costs per unit of output than even very cheap labor can provide. So, whereas call centers, for example, used to be mostly staffed in low-wage countries, now the computer-robot that does most of the talking can be located in New York.

That observation should not, however, overshadow fundamental economic insights – specifically, that trade and the location of production are determined by comparative, not absolute, advantage. A country will always have a comparative advantage in something; but that something changes.

Many advanced countries, for example, now have a comparative advantage in high-value-added activities. In other words, thanks to their highly skilled labor forces, they are better equipped than their developing-country counterparts for activities like the production of made-to-measure specialized goods or, indeed, anything that requires a highly trained team to work in close proximity.

But the technology-induced shifts that are underway could portend big disruptions in global value chains – disruptions affecting both developed and developing countries. In fact, we may have entered a period of fundamental change that could weaken growth everywhere, as the “old” shrinks before the “new” can occupy sufficient space.

To be sure, the creative destruction that is taking place seems to be affecting developing-economy growth proportionately more than advanced-economy growth, largely because the new technologies are being put to work where they were invented, and developing countries have not yet managed sufficient imitation. But I am not convinced that “catch-up” opportunities will remain diminished – not least because it will always be easier to imitate than to invent.

In fact, it could be argued that new “leap-frogging” may become possible. As experience in the telecommunications sector shows, the ability to adopt new technologies without first having to dismantle old systems can enable rapid progress.

The key to enabling continued convergence – even at a fairly rapid pace – is good political governance. Developing-country governments must implement policies aimed at managing the impending transformation, while maintaining social solidarity and cohesion. That is the challenge they must meet at this time of great disruption.